Supply Chain Trends for 2013

How do those three words “supply chain trend” grab you? Perhaps there’s a sense of something new; issues to be resolved maybe, but also opportunities to be seized, with a notion of change that lets you savour developments as they unfold. That’s one perspective. However, a trend can be a treacherous thing. What seems to be an absolute truth may be no more than a consequence of a deeper, underlying phenomenon. It can fool companies into treating a symptom, rather than a cause, or into thinking that doing well on just one task is enough, and neglecting other essentials along the way.

There are already multiple trends at work in 2013, corresponding to the inherent complexity of supply chain. Some are continuations from last year, now being jogged along by industry and world events. Some are necessary, but not sufficient. Others are red herrings – they bring no real advantage to the industry or the customers served, yet companies insist on following them. Yet others are trends that, if they are not prevalent today, will have to come to the forefront, because they will underpin the success of other initiatives.

Higher visibility of a trend is therefore no guarantee of higher importance. A supply chain must be viewed both holistically and in detail, and the component parts balanced out for best overall performance; so too must the trends for this year be considered as a whole as well as individually. It’s this global view that allows the links and the intersections to be spotted, and to understand which trends are driving others.

Circles of Influence Gone Wrong?

A simplified version of the circle of influence, the concept from Stephen Covey, is that you get results by acting on the things you can influence, and that you should not worry unduly about those you cannot. This approach has merit, because you focus your energies on achievable results. Nevertheless, the risk is to become overly inward-looking, and to ignore external factors that cannot be completely controlled.

Similarly, what were initially commendable trends to get logistics and distribution optimised from the inside may now turn into more dangerous tendencies towards introspection that deny businesses an appreciation of supply chain as a whole. By focusing obsessively on what they can change inside their organisation to enhance supply chain performance, they fail to properly consider what outside forces can in turn change them. Instead of shaping their future as they believe they are doing, they will ultimately be limited to playing catch-up as the market moves ahead without them.

In 2013 cost reduction, optimisation of offshoring, and shared logistics and distribution are all popular trends, but they often also signal a “disconnect” between the supply chain operation and the outside world. The temptation to launch initiatives in these areas is clear: it is the control over and the immediacy of the impact on the bottom line that makes following these trends so attractive. Yet if these actions are carried out to the exclusion of others, profits may be only short term at best.

Regional Differences

It would be overly simplistic to label different regions of the world according to whether they were outward or inward looking. On the other hand, there are signs that cost reduction is often a priority in supply chain operations in Asia, to the extent of ignoring overall strategic business objectives of quality and customer satisfaction. While this doesn’t exclude similar attitudes elsewhere, it mirrors other evidence of a difference between product-oriented business in Asia (with notable exceptions such as Japan and South Korea) compared to market-oriented business in America and Europe. Global IT distributor Ingram Micro for instance, with headquarters in the US and operations in Asia differentiates itself clearly as a market-led supply chain player, compared to some of its local Asian competitors.

How much this will change in 2013 will depend on economic and political developments. However as long as Asian companies can find work as lower-cost subcontractor supply chains to their western counterparts, they will have less incentive to look beyond that time-and-motion horizon.

Seeking New Ways to Reduce Supply Chain Costs

Every dollar saved in costs is a dollar earned in profit. It’s the classic “no-brainer” of company strategy. Eliminating costs is one solution; converting fixed costs into lower variable ones is another. Dealing with the expense of locations to hold stock is an example. Despite the rise of online trading, e-commerce organisations still want distribution and fulfilment facilities close to end-customers. This has led competition with bricks and mortar companies and rising prices for suitable property; a situation likely to continue in 2013 in more highly developed countries such as Australia, the United States and Western European nations.

This in turn pushes enterprises to consider other solutions than fixed multinational supply chains with the overheads of large distribution centres. In addition, the DC and warehousing solutions that they turn towards must also be responsive to changes in requirements, such as those generated by emerging markets. The result is that flexibility will increasingly be built into downstream operations over this year, with enterprises adopting an “agile” approach of frequent adaptation. On the other hand, simply pressuring suppliers to lower their prices does not necessarily translate into any added value perceived by the market.

Alternatively, companies may choose to tailor individual supply chains and their demand management strategies according to the different sets of customers they serve. Overall supply chain in a company then becomes a collection of customised supply chains: a separate supply chain for each business unit.

Demand Management

Out with forecasting, in with demand-driven replenishment – such is the mantra for 2013 as another way to contain and reduce costs. While stock-profiling already helps an organisation to optimise and reduce inventory costs, demand management can take this even further: high street retail outlets that stock just one item of each product for display are now a real possibility. Points of sale may also be transient and no longer static; the age of the pop-up physical retail outlet has arrived.

Logistics providers in China are reacting to demand management needs by introducing “destination hubbing”. The hub concentrates products destined to be shipped to final outlets in different countries, and relies on demand management techniques to avoid stock sitting idle in countries where demand has slackened. The approach depends on close collaboration between the demand and supply sides of a business. Implemented correctly, it provides a solution to the volatility of demand and the fickleness of customers, increasingly aware of the choice they have between different suppliers.

However, some businesses will be able to smooth the demand in 2013, while offering their customers a better buying experience. “Click and Collect” is an example, where retailers give customers the possibility to order over the web and to then come to the shop or supermarket in a pre-defined time window to pick up what they bought. Customers avoid queuing; businesses can avoid peaks and troughs, which is always good for containing costs. UK department store John Lewis achieved two-digit growth during the Christmas period of 2012 using this technique.

Wait… Isn’t That a Customer Over There?

There is one element that should influence the whole of a supply chain, but that sometimes seems strangely absent. It’s the end-customer. If the current preoccupation with cost cutting is any guide, this situation will continue in 2013. While some firms make a point of starting from their goals of customer service to then define their supply chain accordingly, in others a stubborn focus on cost reduction instead prevents attention from being paid to anything related to marketing or end-customer satisfaction.

Yet increasingly in both B2C and B2B activities, customers and their lifestyles are factors that must be taken into account. With mobile devices such as smartphones and tablets, customers can connect to the web from practically anywhere in the world and at any time. They naturally develop the expectation to be able to buy anywhere, anytime, with appropriate fulfilment by the supplier. Enterprises that understand this are developing the marketing dimension of their supply chain to extend to customer relationship management and interaction through social media. In particular, supply chain star Walmart currently ranks among the 30 biggest advertisers on Facebook, while Coco-Cola and Disney are in the top ten for the most Facebook “Likes”. Upstream, enterprises are also giving input upstream on product development that will allow the supply chain to function even better and improve customer satisfaction still further.

This is not to say that customer satisfaction and cost reduction are incompatible. The examples of agile distribution solutions and “Click and Collect” above show that businesses can have their cake and eat it too. All the same, old habits die hard, and those who have been focusing exclusively on cost reduction so far are likely to continue with the same strategy this year, at least until the customer attrition rate becomes unbearable.

Differentiating Between Cost and Value

One of the challenges in supply chain performance is to differentiate between what a part of the supply chain operation costs a company and the value it gets back. Over recent years organisations have worked towards a better understanding of how costs are incurred and how they should be allocated. The Cost to Serve model is an example of an approach that takes into account costs and customer satisfaction, and ultimately value to the company.

The current gap between cost-driven and value-driven supply chains may well widen in 2013. If it does, then improved visibility of relevant data that allows better estimation of value will be a factor. These data require collation from different locations in a firm’s supply chain and possibly from its supply chain partners. As a unifying medium that also extends to company’s upstream and downstream supply chain partners, cloud computing services now help to assemble this input for both holistic viewing and drilling down into the data. Widespread acceptance of cloud computing will ease the transition from cost accounting to value-based supply chain management, and further emphasise the divide between the two camps.

Self-Inflicted Costs of Technology

So if cloud services now help companies understand value better, if “Click and Collect” web-based systems improve the customer experience and if mobile devices provide that last-mile ordering link from anywhere, will 2013 be the year of the automated supply chain? Will Big Data and predictive analytics mean that companies will be able to rely solely on smart systems and a few programmers for excellence in supply chain performance?

While job security in supply chain has no more currency nowadays than in any other profession, at least people should know what they should be worrying about. The danger is not that technology will replace people: it is the erroneous belief by companies that technology will replace people. Technology can be a powerful tool, but it is no substitution for the knowledge acquired by people working in the industry. Supply chain is not alone in this respect. The financial sector for all its automated transactions and trading still relies on human knowledge for the ultimate truth, and so does the weather forecast.

Nonetheless, technology will continue to develop throughout 2013, and so will the risk of following technological red herrings. Big Data and RFID technology are cases in point. On the one hand, the immense amounts of data involved can be fed into powerful systems for rapid processing and analysis. On the other hand, there is no point in collecting data that are of no intrinsic value to a company, or that require intensive programming efforts for analysis where human judgment and experience could provide answers faster and more meaningfully. The technology is not at fault. It does things right; it just doesn’t know which are the right things to do.

Offshoring, Re-shoring and Right-shoring

Made in China. Shipped abroad. Blocked by dockers. And cursed by customers? The US in particular has experienced problems in bringing products in by sea, because of industrial action in the ports. The risk of natural disasters disrupting supplies from offshore locations has also called into question the viability of sourcing from China where risk management plans and policies are still not up to the standards of Europe and the US. As another nail in the offshoring coffin, now that China’s economic power is taking effect with the emergence of the country as a key trading block, the financial advantage of sourcing products from it is starting to weaken. These different factors all contribute to a trend towards “re-shoring”, in which manufacturing is brought back to domestic suppliers for reasons of cost and reliability of supply.

But repatriating production is not necessarily the solution for every enterprise. China can still offer attractive cost structures for different markets and the upgrading of the logistical infrastructure in mainland China means that somewhere between offshoring and re-shoring, right-shoring may be the best choice. China remains a popular choice for origin hubbing, where products are picked and packed for multi-vendor and multi-country distribution. There is a cost advantage to companies using this approach because it obviates the need for distribution centres downstream. In addition, operational costs in themselves are still only 50% to 70% of those for Hong Kong, but with supply chain facilities that now rival those of Hong Kong in terms of capability and performance.

Importation problems notwithstanding, China may have yet another supply chain card up its sleeve. This year, a Chinese company plans to make the first commercial voyage through the Arctic icepack to reduce shipping distance to American and European ports by thousands of kilometres. While Pacific Rim countries like Australia that are supplied by China will not benefit from such a transport breakthrough, the cost reductions concerning other destinations could help to keep China cost-competitive even as its economy grows richer.

The Free Trade Agreement Jigsaw

Which solution is best for right-shoring in 2013 can only be determined by analysing the data overall and calculating the relative costs and values of different hubbing configurations. The stakes are important: from a cost standpoint alone, the choice of a regional hub can make a difference of 15% to 20% in the operational expenses. Part of these calculations involves factoring in the free trade agreements either in place or likely to be put in place in the near future.

Currently China, Japan and South Korea are on the verge of discussing a tri-partite regional free trade zone. Japan has also announced that it plans to participate in the Trans-Pacific negotiations, which are being conducted between Australia, Brunei, Malaysia, New Zealand, Singapore, and Vietnam, together with Canada, Chile, Mexico, Peru and the United States. Meanwhile Canada and China have moved closer to a full free trade agreement, following announcements from September, 2012. Other free trade talks between the European Union and Japan have been scheduled, but postponed because of the crisis in Cyprus. Monitoring progress and implementation of such agreements to keep track of the impact on supply chain operations will be important over the next twelve months.

From Competition to “Co-opetition”

As the saying goes, if you can’t beat them, then join them – at least for supply chain operations. Although agility, flexibility and supply chain reengineering can all help to reduce costs and add value for customers, some things like specialised storage for pharmaceutical or chemical products don’t lend themselves so easily to the same approach. Facilities like these often represent considerable investment; economies of scale may be possible, but excess, unused capacity represents a hit on company profitability.

The argument is then to team up with other companies with the same need, to split the costs and share the benefits. It doesn’t necessarily matter if the firms involved compete in the same market, as long as there are suitable contractual agreements about how they use the facility between them. Pioneer US personal healthcare company Kimberley-Clark started doing this a little over ten years ago in Europe with what is now Unilever’s Home and Personal Care unit. Successfully spotting such opportunities, and planning and using shared resources require sharing information between the “co-opetitors”: another instance where cloud services can provide a neutral, independent support for operations.

That Human Factor Again

Which trend will be the most important for your supply chain in 2013 – new ways of cost reduction, right-shoring, shared supply chain resources, the shift to value-based management, the integration of next generation technology? The answer depends on the specific context of your business, even if one thing is sure. No single trend can be followed to the exclusion of others for anybody seeking supply chain success this year.

However, underpinning all of this is the calibre of the personnel making the supply chain work. Whether or not these aspects are developed over the coming year, human resource management and talent management in particular are still fundamentally the means by which one supply chain will be able to outperform another. As complexity grows or as separate supply chains spring up in symbiosis with the business units they support, all the participants will have to work together efficiently and effectively. Although technology allows information to be collected, managed, dispatched and exploited in real time, it will still take knowledgeable human beings to make the whole operation work.